Business and management

Lending Club

Peer review

LATE last year we ran a piece on the bank-shaped hole in Europe, the huge funding gap left by retreating banks that needs to be filled by non-bank lenders. The article committed a couple of sins of omission*, among them a failure to mention Lending Club in the section on peer-to-peer lenders.

Lending Club is American, not European, although its chief executive and founder, Renaud Laplanche, is French by birth. But it is the world's largest peer-to-peer lending platform, and its growth helps to explain why expectations for the potential of this new lending channel are high.

Lending Club was launched in 2007 after Mr Laplanche took a closer-than-normal look at his credit-card bill and saw that the interest charge on unpaid balances was north of 18%. That seemed extortionate, especially given the meagre rates of interest he got on his bank deposits. "A very wide spread is always a signal of opportunity to an entrepreneur," says Mr Laplanche, who had already set up and sold off a software firm before starting this venture.

Like other peer-to-peer platforms, Lending Club brings that spread down by using technology to match up borrowers and investors without incurring the costs of legacy IT systems and branch networks that weigh down the banks. The firm concentrates on creditworthy, "prime" consumer borrowers, and the average rate that they pay on loans is 14%, well inside credit-card charges. Allowing for a default rate of 4%, and Lending Club's fees, the returns to investors are 9-10%, which isn't too shabby given where interest rates are.

Mr Laplanche's goal is to maintain its recent record of doubling the amount of lending being done via the site every 9-12 months. The site surpassed $1 billion in loans taken out since launch in December; this month it will do $100m in business. That puts it well ahead of rivals, and gives it the sort of heft that starts to generate network effects. A bigger marketplace attracts more borrowers and investors. It also increases liquidity: there is a nascent secondary market for Lending Club loans.

Institutional investors are taking notice. The largest single investor on the site has put in $60m. Family offices and credit funds are among those to have invested; Lending Club even has a bank on the books. Mr Laplanche says he was recently approached by a sovereign-wealth fund that wanted to put $250m onto the platform to fund loans. (He asked them to spread the investment over a two-year period, so that it did not account for too big a proportion of the site's origination capacity.) It helps that the firm's board of directors features heavy hitters like John Mack, once of Morgan Stanley, and Larry Summers, once of the Treasury. This is a long way from the garage start-up.

One reason for its success is that the firm sells itself not on the availability of credit but on its affordability. Mr Laplanche is targeting prime consumer borrowers—the sort that can get credit anyway—and positioning Lending Club as a cost-effective alternative to other sources of finance. That keeps default rates low. Going into subprime categories of borrower would mean too much risk for Lending Club's retail investors, he says.

There is a lesson here for others. A lot of the buzz around peer to peer in Europe comes from the fact that it is seen as a solution for borrowers who have been turned away by the banks. The success of Lending Club shows that the sector has staying power: like Prosper, an older but smaller American rival, and Zopa, a British firm launched in 2005, Lending Club has survived and grown through the financial crisis. But it also suggests that peer-to-peer lending may not be as much help to the marginal borrower as some hope.

* Another will be rectified next week. I blame the author of the original piece.

I am subprime, like many not only through only edeverours but family.(although everyone has excuses may be just not taking personal responsiblty)

When first defaulted I had a my brother bottle me in back of head
which meant leave university so unexpected plans. My father then wantedme to use card and another things. (although of course there is personal responiblty for everything someone does, may be i say no to my card use for people that in these tricky situation. This is not realstic.

I did try and borrow 5 pounds from the bank 2 days before to get away to avoid attack. So i justifiy there failure for my default, lol whatever everyone has some excuse right.

Since was unemployed not at uni had head aches poor concertation. I live family member where i then take another account and give them money which told be paid back but new not really liky but take money out

But what does this mean for credit and rating?

Well I as an indvidual are not a bad credit rateing in realtivtney. Never defaulted on a real debt or obligation that was not taken through family pressure as far as aware. The pressure not there so not bad risk. But of course credit rating would not be able to tell this.

Although of course a rating agency would see a bad risk as in stats.

In respect of predicting future defaults. Would have no more of a default risk that someone with no default of a similar type.

These family debt issues are common, buiness in peoples name dont know they are in loans or taking out borrowing in others names is a common thing.
The problem from a risk rating perspective is when would someone be able to measure when the person had isolted from the source of theses issues.

But did wonder if for partners, more so women than men even who have also of experiance debts that they had no real charge over.

This could be a mis risk assesed a group. Which could be a good market would think already factored in in theory but in pratice would wonder as have not been able to find experians formla or data in the 5 mins was looking-)More often than no the "black box" is just garbage so would not be surpised if credit rating agencies are are but dont know that.

May be credit rates of women that split from partner be a overrated by agencies for example.

Still this whole credit think generally seems a somewhat of a nonsense, after "too big to fail" with government medalling in who can get morgages etc rather than letting market decide. Would think allowing buiness to fail be as import as allowing buiness to succeed.

As what have had since 2008 is governments subziding holders of wealth at a set date.

Many of which should have lost there money left to there own devices and personal edevors.

Dening other the opperunity to use these resouces more efficency on some occasion. If the car insudtry was too big to fail we would still be driving in austin metros that rust and dont start no japanese cars that work. The people that make the betters cars the japanese would have mised opeprtunity so would the buyers of cars.

Not sure if this credit market like a rusting austin metro with the duff rating systems, poor risk assement are the equivlent.

Now that government runs the credit markets or markets all togher with the impliced support on downside risks. Where is less incentive to risk assess any better.

To be pholisophical and silly we hear all this news about libour rates fixing and legal cases by people effected. BOE being manipluteing interest rates for years.
To be equally silly what seems to happen bail out preserved status quo at time of those holders of wealth. What of all the people whos oppertunity is lost through this interven that in freemarket may have used resounces more effency. Where is the compenstion for people who could have benefit by the failure of other to manage there affairs. (of course just being philosofical)

This group credit thing seems good as way to try get around the austin metro of credit system that have.

Although its out of fashion think more being done on subprime would nice.

it seems funny in this new age, where i have a credit problem it is now a poltical issue cant get a morgage you complain to an MP. As they set the rules and agree bail outs (or not in mines case)and apart from actuall ownership of banks own the banks in a sense.

May be more peer peer can fill the voild left by a freer market. Where bankers calculted risk and decided what to take on the understanding took upside and lost on the downside.

Next time there is a failure in buiness may be it better if governments provides unemployment benefit food aid. Normal benefits rather than subsized other peoples poor finical decsions. Not sure keeping the status quo of 2008 for ever is most efficent lol

but then again this very unstable so may be just is a too big to fail. So have to wait for some small peer to peer to fill some bank shape viods.

Sin of omission? Not at all. It would be worth mentioning if it actually brought finance to those that need it. Otherwise, it is more of the same. Perhaps these "heavy hitters" on the board might want to put their time to better use. They should step back and watch platforms like Zidisha teach them a thing or two.

Sin of omission? Not at all. It would be worth mentioning if it actually brought finance to those that need it. Otherwise, it is more of the same. Perhaps these "heavy hitters" on the board might want to put their time to better use. They should step back and watch platforms like Zidisha teach them a thing or two.

What the author fails to mention is that when peer to peer lending first launched in the U.S. (Prosper launched 18 months before Lending Club) in 2006 they were targeting sub-prime borrowers. At Prosper you could get a loan with a credit score of 520 or more. My research has shown that the default rate on people with a credit score between 520 and 560 was 60%. That is not a formula for a successful business and Prosper suffered because of it. Today, Prosper is very different - the minimum credit score is 640 and they have an annual default rate in the 4-5% range.

Lending Club made a prudent decision to focus on prime borrowers only and they have been rewarded because of it. I am sure one day some enterprising entrepreneur will figure out a way to lend money to sub prime borrowers profitably. Maybe a model like Zidisha or Kiva could work in the developed world where investors can receive a decent return on their money and sub-prime borrowers can get access to capital. But it would need to take a different approach than Prosper tried in order to be successful.

Yes, I agree it helps to focus on prime borrowers only if all you really care about is maximizing profits rather than doing something impactful. Zidisha is just ramping up, but they are able to connect to borrowers that are much harder to reach. The difference is Zidisha is not in it to make money. They are in it to make a difference by getting low-cost loans into the hands of poor borrowers in developing countries. And these are true person-to-person loans at low interest rates. Kiva does not offer true person-to-person loans like most people think. Instead, they lend to MFIs that line up the individual loans, and many MFIs they work with charge ridiculous interest rates, sometimes in excess of 100%. So, people need to know this so they don't make the mistake of lending through Kiva when they could instead go through Zidisha. In any event, I think the author of this article should be touting Zidisha-like platforms when talking about funding gaps. These are the borrowers that are facing the funding gaps, not prime borrowers. If you want to talk about truly being innovative, then you need to take on challenges like this. Lending Club may have done over $1 billion in loans since its launch, but that is a far less admirable achievement than what Zidisha has managed to pull off.

Lending Club's success is admirable, however, the key take-away from this article is this: "Institutional investors are taking notice. The largest single investor on the site has put in $60m." The truth is the overwhelming majority of LC notes have been funded by institutional investors. In fact, Laplanche has openly admitted in other interviews that he expects upwards of 70% of the loans on the platform will be institutional within in next year. This is "peer-to-peer lending"? Personally, I'm not comfortable with a business that claims to "bring banking back to it's roots", selling the media the feel-good p2p lending value proposition, when it's effectively a huge lie. If LC's billion dollars in loan volume were truly p2p, I might be impressed with their accomplishment. Alas, they're simply a Wall St. note broker posing as a p2p lending company. Rumors in the industry are they will be phasing out what's left of the relatively insignificant portion of the p2p platform within the next two years. Let's face it -- who want's to make an unsecured investment in a stranger with no way of verifying the loan is actually used for its stated purpose? It's clear the original p2p marketplace business model was destined to fail in America, and hence, the platform was opened to institutional investors. Remember, when Zopa pulled out of the US entirely? I'm far more interested in seeing how real peer-to-peer platforms like, Bolstr, National Family Mortgage, SoFi, SoMoLend, perform over the long haul. The question is, will any of these companies stay true to the real p2p lending concept, or will they sell-out like LC in order to survive?

Carl, Renaud Laplanche, CEO of Lending Club never intended his company to be a true peer to peer lender. It started out that way but the as Laplanche has said time and again the intention has always been to disrupt banking and bring efficiencies to a 20th century business model.

Also, I follow this industry very closely and I have never heard a word from Lending Club or Prosper for that matter of the intention to phase out retail investors completely. I expect individual investors will remain a portion, albeit a smaller portion, of their business for many years to come.

Peter, are you Mr. Laplanche's publicist or something? You claim that Mr. Laplanche "never intended his company to be a true peer to peer lender." While that may be true, LC has successfully branded itself as the de facto p2p lender in America. In fact, in the first paragraph of this very article the author virtually apologizes for not including LC in a previous post on p2p lending! This leaves me no choice but to believe that the company has intentionally misled ignorant consumers and members of the media to believe LC is a far more noble company than it actually is. Consumer trust is already at an all-time low in financial services. The ideals behind p2p lending, which LC continues to shamelessly market, resonate with consumers who are hungry for change. Sadly, these consumers are being exploited and misled. There's nothing "disruptive" about LC; they turn away 90% of their loan applicants. Surely the lucky 10% allowed to join the platform could have obtained financing from any bank in the country. I suspect that many of these borrowers joined the platform because they wanted to be a part of the advertized change; they wanted to stick it to the banks. In truth, more than half of the loans on the platform have already been funded by the Wall St. machine that caused the financial crisis in the first place. The joke is on us.

Carl, I run a blog about p2p lending and I have money invested with Lending Club and Prosper. I realize I am not exactly an impartial observer but I have been following this industry very closely for several years now.

I don't feel that LC has misled the public. They do not hide the fact that a good chunk of their money comes from institutional investors. The trouble is that the media, myself included, continue to call this industry peer to peer lending, when that is no longer an accurate description. You will notice no mention of that term on LC's website but if I started talking about "Prime Consumer Notes" to the general public they would have no idea what I mean. So until we can come up with a better term for this industry it will continue to be somewhat misleading.

One last thing, most of the borrowers I have spoken with have decided to obtain a loan with LC because of the favorable interest rate. Many of these people could have obtained money elsewhere as you point out but they want to get the best rate possible and LC had that rate. They only mention the p2p aspect as a side benefit, it is the financial benefit that is most important.

I read somewhere that Zopa pulled out of the U.S. because the United States Government required that P2P loans be registered as securities. This apparently involved a large amount jumping through hoops, which Prosper and Lending Club did, Zopa decided to opt out of the U.S. market rather than comply.

I'm slightly lost on why we need to fill the "bank-shaped" void. The major starting point of the credit crunch was that banks had over-lent too much money to people who couldn't afford to pay it back. Everyone got upset that the banks had given people loans who shouldn't have been offered them leading them to bankruptcy and losing their houses.

Once the reaction to the credit crunch started, banks cut their balance sheets, deleveraged, etc. Thus we reach the new situation where people complain that banks aren't lending enough money. (Before that was drowned out in the mass media by government debts).

Now I've read a few economist articles looking at these non-bank lending schemes and I'm asking myself, isn't this what we're trying to avoid? This looks like just another back-door to "allowing" people to take on extra debt that they couldn't afford to before and still can't.

Does this not mean we are heading back towards the same abyss (as KAL points out, I can't use cliff any more) as we started out on a decade ago? As the article points out, a secondary market is developing. That's one step towards nicely securitised instruments in a whole new world of under-regulated finance that has no track record and it turns out that everyone and their mother is exposed to.

The article points out that they have a bank on their books. Why isn't the bank (I'm assuming its a retail bank) lending to their customers directly. Why can't these people get bank loans? Why will a bank not lend to individuals, which is meant to be their expertise and value added, but will delegate it to somebody else? Why are individuals choosing this route instead of formal bank loans, as the article says they can?

Are comparisons to credit-card interest rates accurate? I personally see credit cards as more unplanned overdraft facilities (with some buyer protection thrown in), thus they would normally charge more than planned lending, of which this appears to be.

Have banks over-reacted in their restriction of loans to individuals? If so, why? This is where they make their profit, why are they are allowing the competition to supply this new lending?

The advantages offered by peer-to-peer lending appears to be looser credit checking between people who aren't experts in the field, and lack of regulatory oversight. I would describe these more as risks. Other than that they may be avoiding the tainted public mistrust of banks, with their "different" image. This seems like it must be a transient phenomenon, as banks will just re-brand themselves.

"This looks like just another back-door to "allowing" people to take on extra debt that they couldn't afford to before and still can't."

But it isn't. I'm an investor with Lending Club, and I solely invest in loans for reducing credit card debt. The borrowers already owe the money to credit card companies, and will have to pay it back anyway, but Lending Club allows them an often much lower interest rate than the credit card companies force them to pay. So these are debts that are already on the books, not "extra" debt. And since the interest rate is lower, it's easier for the borrower to pay back, plus (my personal favorite) it keeps unneeded profits away from credit card companies that certainly don't need any increase in revenue.

Okay, so for you it's the fact that a lack of competition in the debt market at the minute was allowing Credit card companies to make abnormal profits, allowing you to step in with a cheaper price for your customers. This is fine, but it's not creating extra debt options, its merely offering a better rate for people who already have access to debt. However I'm all for taking away producer surplus.

Also should point out that lending club does do credit/background checks like any bank does. It only loans to credit worthy investors(Not SubPrime)- So these are people with perfect/near perfect credit(at worst average) who never missed a payment then had credit card interest jacked up crazy amounts 50-100%.
Also if the people don't pay they are sent to a collection agency, and get the same hits to their credit if they don't pay a bank.

I have been investing with lending Club for the past few months. I am not financial analyst but to mee I find the approach is simple and straight forward. I do not put more than $25 in any one loan and try to spread it in different groups. I think this is a far easier concept to understand than stock market and mutual funds. As in any business act with caution, asess you risk tolerance.
Another comfort I feel is even when I lose money invested some of those (I've borrowed the needed amount same day with this website), I feeel better to know it went soe ordinary guy trying/ struggling rather than stolen by some croks disguised as bank executives.

As an American, so far the biggest downside to LendingClub (and similar services) is figuring out what to do on your income taxes. The current regulations leave more questions than answers, and LendingClub is understandably not offering any advice. Accountants don't know what to do either.

Don't get me wrong, my investments in these services have done well; the blame belongs with the overcomplicated US tax system.

For your readers that are interested in Peer to Peer lending but don't know how to get started, we can help. Peer Lending Advisors facilitates Peer-to-Peer Lending for high net worth individuals. Check out our website to learn more.

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